The U.S. federal government is set to face a significant fiscal challenge this year, with projections indicating a budget deficit of $1.9 trillion, according to the nonpartisan Congressional Budget Office (CBO).
The CBO has recently updated its forecasts following the passage of President Donald Trump’s expansive tax and spending legislation, often referred to as the “megabill.” This legislation is expected to add an astonishing $3.4 trillion to the deficit over the next ten years.
When the government incurs a deficit, it borrows the difference, which accumulates and contributes to the national debt. As of August 8, the national debt has escalated to nearly $37 trillion.
The recently passed megabill also raised the federal debt limit by $5 trillion, bringing it to $41.1 trillion. However, analysts believe that this increase may fall short of future needs, with the CBO estimating that national debt will soar past $52 trillion by the end of fiscal 2035.
According to the Pew Research Center’s analysis, much of the conversation surrounding the national debt centers on the concept of “total public debt outstanding,” which was reported to be just under $37.0 trillion upon publication of the analysis.
Notably, approximately $115.0 billion of this total is not confined by the statutory debt limit. This figure largely consists of Treasury securities issued at a discount and certain other federal financing measures.
The U.S. Treasury Department provides extensive resources detailing the public debt, including its composition and ownership. The Monthly Statement of the Public Debt serves as a primary source for recent data analysis.
Compounding the challenge of rising debt is the unique aspect of the U.S. federal debt limit, a feature not commonly seen in other countries. The only other country with such a law is Denmark, while nations like Australia and Kenya have pivoted towards more dynamic debt caps linked to Gross Domestic Product (GDP).
European Union countries, for example, aim to maintain public debts at no more than 60% of GDP. However, enforcement of these limits can be lackluster, with many countries exceeding the threshold.
Historically, the U.S. operated without a formal debt limit for more than a century and a half, as Congress managed bond issues for specific purposes. Significant milestones included bond issues to finance the Louisiana Purchase and the Civil War.
The transformation towards the modern statutory debt limit commenced during World War I due to the extraordinary borrowing needs of the government. By 1919, the U.S. had issued $21.5 billion in bonds.
As the bond issuance process became increasingly complex through the 1920s and 1930s, Congress began delegating authority to the Treasury Secretary to issue new types of debt securities. This evolution shifted the statutory framework towards broad debt caps.
In 1939, the U.S. officially established an overall debt limit of $45 billion, a milestone in the creation of the current framework governing government borrowing.
Currently, the U.S. national debt dwarfs its economic output. As of June 30, GDP stood at an estimated $30.3 trillion, while the national debt reached $36.2 trillion, resulting in a staggering debt-to-GDP ratio of 119.4%.
Examining the debt-to-GDP ratio reveals three key phases of growth tied to large federal deficits: during the 1980s under Reagan and Bush, following the 2008 financial crisis, and during the COVID-19 pandemic when the ratio peaked at 132.8% in the second quarter of 2020.
Who holds U.S. debt? Private investors constitute the largest segment, owning about two-thirds of the national debt, which translates to $24.4 trillion as of March 2025.
Federal trust funds and retirement programs hold an additional $7.3 trillion, while the Federal Reserve System possesses approximately $4.6 trillion independently.
In terms of specific ownership, social security trust funds held nearly $2.7 trillion in special Treasury securities as of July 2025, while various military retirement funds accumulated over $2.2 trillion.
Medicare trust funds represented a combined value of $425.3 billion in Treasury securities.
Focusing on overseas ownership from December 2024, around $8.5 trillion, or 23.5% of total U.S. debt, was held internationally. This includes substantial stakes from foreign governments and private investors.
Japan leads as the largest foreign holder of U.S. debt, with $1.1 trillion, followed by the United Kingdom and China, holding $809.4 billion and $756.3 billion respectively.
As the national debt swells, interest payments have soared, surpassing annual spending on both Medicare and national defense. In fiscal 2024, the government incurred a net interest expense of $879.9 billion, accounting for 13% of total expenditures—a figure that mirrors the highest share seen in 25 years.
This amount edged out outlays for Medicare and national defense, which amounted to $874.1 billion and $873.5 billion respectively.
Interest payments now represent a significant portion of the government’s major spending categories, following only Social Security and health care expenditures.
Over the past quarter-century, a general decline in interest rates had helped curtail the costs associated with servicing national debt. However, the tide began to turn in the spring of 2022 when the Federal Reserve initiated a series of interest rate hikes.
As a result, the average interest rate on federal debt, which was as low as 1.556% in January 2022, has more than doubled, rising to 3.352% as of July 2025.
Though this is still comparatively lower than the interest rates during the 1980s and 1990s, it marks the highest average rate encountered since the Great Recession.
This analysis serves as an update to a publication originally released on October 9, 2013, reflecting the evolving dynamics of the national debt and fiscal responsibility in the United States.
image source from：pewresearch
